How open is America?
“JUSTIN has agreed to cut all tariffs and all trade barriers between Canada and the United States,” claimed President Donald Trump to laughter on June 8th, at the G7 summit in Quebec. The next day, in apparent seriousness, Mr Trump—who has slapped tariffs and quotas on imports of aluminium and steel from all the G7 countries, and others—called for unfettered trade within the group: “No tariffs, no barriers. That’s the way it should be.”
Over the next two days a more familiar Mr Trump reappeared. After Mr Trudeau said, at a post-summit press conference, that Canada would not be pushed around, he fired off a barrage of tweets calling him “very dishonest & weak”. He blasted Europe too. And he tweeted: “Sorry, we cannot let our friends, or enemies, take advantage of us on Trade anymore.”
Suspend disbelief and suppose that Mr Trump’s offer of a barrier-free world is serious. He may want to tear down tariffs and quotas out of a yearning for open markets and lower prices for consumers. More likely, he reckons that the status quo is unfair because America is more open than any other rich country. In a free-trading world, other countries would have to lower their barriers by more than America would. Is he right? Reality is a little more complicated than he may suppose.
Mr Trump is fond of picking out his trading partners’ egregiously high tariffs. In his Twitter tirade he slammed Canada’s 270% levy on dairy products (which applies after quotas with much lower tariffs have been filled). He despises the European Union’s 10% tariff on cars. But others can play that game too. Once quotas are filled, shelled peanuts going into America face a tariff of 132%, and raw tobacco duties of 350%. EU negotiators note that America applies a 14% levy on incoming train carriages.
Averages are generally more instructive than anecdotes. According to the World Trade Organisation (WTO), on a trade-weighted basis in 2015 America’s tariffs averaged 2.4%, slightly higher than Japan’s at 2.1%, but a bit lower than Canada’s at 3.1% and the EU’s at 3.0%. Even these figures should be treated with caution. America allows in more products tariff-free than the EU, for example, but the duties it does charge are higher. And trade-weighted averages can mislead, because goods with crushingly high tariffs will naturally have lower weights.
To Mr Trump, who prefers one-on-one deals to multilateral rules, bilateral figures may mean more than averages. Some of America’s highest tariffs are on products it buys relatively little of from the EU. Textiles, apparel, footwear and travel goods accounted for 6% of American imports in 2017, but 51% of tariff revenue, mostly paid on stuff from Asia. According to WTO data, American tariffs on agricultural products imported from the EU, Canada and Japan are lower than on those flowing the other way. But the picture is different for other goods (see chart).
All these figures describe the tariffs trade negotiators usually haggle over. But they leave some things out, like defensive duties against imports that are subsidised or sold below cost. America is a heavy user of both. It applies far more than the EU, Canada or Japan. Its trading partners sometimes object that it breaks its WTO commitments in the process. In December Canada filed one such complaint.
Overall, however, rich-world tariffs are generally low already. Other distortions are more pernicious. Agricultural subsidies are one example. According to the OECD, in 2014-16 the gap between producer prices and world market prices for agricultural goods in America was smaller—ie, less distortionary—than in the EU, Canada and Japan. (Overall, China doles out more support than those three.)
Other non-tariff barriers include the “Buy American” rules that favour American suppliers for public procurement, and complex labelling requirements. Not all barriers have protectionist intent; other countries have plenty of them, too. Their effects are tricky to quantify, but trade geeks think they crimp commerce among rich countries more than tariffs do.
Finally, there are barriers to trade in services as well as goods. These include rules obliging foreign insurers in New York to hold more capital than domestic ones, or laws like the Jones Act, which says that boats travelling between American ports must be made in America, carry the American flag and be owned and operated by American citizens. Of 22 sectors measured in 44 countries in the OECD’s Services Trade Restrictiveness Index, America had seven that were more restrictive than average. Italy was the only country in the G7 with more. None of this, of course, means that America is a closed economy. But if the president were serious about creating a barrier-free G7, every member would have work to do—and America more than he seems to imagine.
This article appeared in the Finance and economics section of the print edition under the headline “Hidden obstacles”
